Brussels - When it takes six hours to draft a single
sentence in a 100-page document, you know things are moving slowly.
In meeting rooms of embassies across Brussels, diplomats are
haggling over the finer details of dozens of reforms more than four years after
the financial crisis that devastated European banks and triggered the
eurozone's struggle with debt.
While the United States in 2010 agreed an initial framework
to prevent financiers taking the kind of risks that sparked the deepest global
recession since the 1930s, the European Union's response is often tangled in
backroom diplomacy.
"Bailout is a naughty word these days but we haven't
created a system to deal with failing banks without one," said a diplomat
from a northern European country who is working on around 15 different EU
dossiers to regulate finance. "We are still spending hours arguing over the
wording of a sentence."
The crisis revealed how regulators and even top bank
executives on both sides of the Atlantic failed to grasp the risks in the
complex financial architecture they helped build.
But agreeing new laws among the bloc's 27 member countries
and the European Parliament is becoming so burdensome that diplomats worry
Europe's defences will not be in place should a new crisis hit.
German lender IKB was the first casualty of the financial
crash in mid-2007, imploding after pursuing what one banker described as an
"all you can eat" strategy, snapping up US subprime mortgage debt.
By the time the worst of the crisis was over in Europe, more
than 50 lenders had to be rescued by their governments.
The EU responded with rules governing hedge funds and banker
pay. But it has yet to outline a framework law for dealing with banks
threatened with collapse, a reform many analysts believe is central in ensuring
that bank bondholders - and not the taxpayer - pay to rescue banks in future.
The delicate state of Europe's banks, which have been faced
with the possibility of a chaotic Greek debt default, is partly to blame.
Banks still have trillions of euros of risky loans on their
books, and it has taken the near-unlimited offer of funds from the European
Central Bank (ECB) to prevent another credit freeze.
Leeway or limit?
Michel Barnier, the former French foreign minister given the
task of leading an overhaul of EU financial regulation two years ago, is due to
present his bank salvage plan sometime this year.
But even when he does, the proposed legislation could take
three years to become law.
"We can't afford any more delays," said Olle
Schmidt, a liberal who is leading financial reform efforts in the European
parliament. "If Europe is to be able to react swiftly to another crisis,
these defences must be in place."
Diplomats have also clashed over proposed rules governing
the amount of capital banks must keep in reserve to cover the risks of lending.
This is crucial in preventing another credit boom of the kind that led to the
financial crash.
Britain wants more leeway to impose stricter standards on
capital than the EU, while France wants the limit capped, reflecting the
different way the crisis affected the two neighbouring countries.
"The French banking system did OK, albeit with public
support, whereas British banks took some serious hits," said Sony Kapoor,
founder of think tank Re-Define.
Overhauling banking is just one of the dossiers keeping
diplomats up late at night in the glass and steel buildings of Brussels'
European quarter - working in tandem with colleagues in their home capitals.
While EU leaders have held 17 summits over the past two
years to resolve the sovereign debt debacle, diplomats are sifting their way
through proposals for regulating derivatives, trading, insider dealing, credit
rating agencies and banker pay.
And with most working groups held in English, non-native speakers
often struggle to grasp the highly technical issues.
One official recalled an embarrassing misunderstanding, when
an ambassador appeared to describe a discussion on hedge funds as being
"like a short shit in a long bath". Participants later concluded he
meant "a short sheet on a long bed".
"Sometimes you understand the words but you don't
understand the meaning," said one Eastern European diplomat.
The final legal text is often as mystifying as the process
that created it. "They are unreadable," said Eddy Wymeersch, a former
regulator, commenting on hedge fund rules. "It is just page after page of
legalese."
Bruce Stokes, an analyst with think tank the German Marshall
Fund, believes Washington works faster because directly elected members of Congress
and not bureaucrats draft legislation. "Brussels is not that
accountable," he said.
Washington drew up the Dodd-Frank act in 2010, a framework
for financial reform that includes sweeping changes including bans on banks
trading on their own account.
Fleshing out the full detail of these rules will, however,
require further work and the European Commission points to its success in
moving earlier on banker pay and bank capital.
In Europe, much of the responsibility for rewriting the
rulebook for finance falls to the commission, proposing and writing the first
draft of laws that are then sent to European countries and the bloc's
parliament for approval.
"The European legislative system is designed far more
for incremental adjustment than for major reform," said Nicolas Veron, an
expert in financial policy who works in both Washington and Brussels.
"It's more bureaucratically driven, but that doesn't mean that the outcome
is not political."
With things moving so slowly, those working on the dossiers
say the new regulations are in danger of being overtaken by events.
"I'll be retired by the time all of this is done,"
said one banker, whose job it is to predict the direction of legislation.
"It's not the kind of work I'd recommend."